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Telecom operators and working capital management 2011

Europe sees working capital recovery

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In the last two years, the level of bad debt in the balance sheet in relation to sales has been increasing at a faster pace, reaching 2.8% in 2010.

In 2010, operators in Europe managed to both reverse the deterioration in WC performance seen in 2009 and beat the previous record of 2008. The net trade WC to sales ratio dropped from –3.6% in 2009 to –4.6% in 2010 (it was –4.1% in 2008). Cash to cash (C2C) fell by 3.5 days to reach a negative figure of 0.2 day.

Source: EY analysis, based on publicity available annual financial statements.

WC improvement in 2010 was entirely due to higher levels of payables (DPO up 9%). By contrast, performance deteriorated for both receivables and inventory, with DSO and DIO up 2% and 5%, respectively. Levels of amounts billed in advance for line rentals and subscriptions (deferred income) remained unchanged at 4.5% of sales. Eleven companies out of 15 reported a year-on-year improved WC performance.

More specifically, several factors may explain the reported year-on-year WC variations, each with varying impacts on different companies:

Rise of data and mixed macroeconomic conditions.

Effects of outsourcing and network sharing.

Greater attention to payables.

Increased complexity in billing.

Inventory challenges.

Rising levels of bad debt

In the last two years, the level of bad debt in the balance sheet in relation to sales has been increasing at a faster pace, reaching 2.8% in 2010. This was most notable among weaker European economies, while the customer debt profile improved in many emerging countries.

Opportunity for improvement

Variations in WC performance between operators in Europe point to significant potential for improvement.

A high-level analysis suggests that the leading 15 European operators have between €10 billion and €20 billion of cash unnecessarily tied up in WC processes, equivalent to between 2.9% and 5.8% of sales.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.